Bounded Rationality, Rights Offerings, and Optimal Subscription Prices

Wolfgang Breuer

Schmalenbach Business Review (sbr), 2008, vol. 60, issue 3, 224-248

Abstract: In an asymmetric information context with bounded rationality, investors’ loss aversion, mental accounting and buy-and-hold behavior may create opportunities for good-type firms to signal their project quality by choosing lower issuance prices at rights offerings than bad-type firms do. Bad firms are prevented from imitating better ones, as their doing so would induce reference price violations with a loss in utility that would exceed any corresponding additional proceeds from the sale of subscription rights. As a by-product, we have, on average, found positive announcement effects from rights offerings. Our behavioral approach may help to explain differing empirical findings across countries and can thus be interpreted as a (quite rudimentary) contribution to the newly developing field of “cultural corporate finance”.

Keywords: Bounded Rationality; Cultural Corporate Finance; Loss Aversion; Mental Accounting; Rights Issues; Signalling (search for similar items in EconPapers)
JEL-codes: D82 G12 G32 (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (2)

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